Monday, August 24, 2009

Deficits & Taxes

I read with great alarm in recent press reports about the need to close the budget deficit and the need to raise consumption taxes to close the gap.

1. For the record, the budget has always been in deficit - saved for the period from 1993 to 1997 when the privatisation of natural monopolies reduced government expenditure and clawed back some revenue. It is therefore not factually correct to argue the overall deficit of the Federal Government should be in surplus.

2. Furthermore, it has always been the traditional discipline of Malaysia to maintain a surplus on the operating expenditure of the Federal Government so that we live within our means. This has always been true except during times of exceptional difficulties such as 1972 and 1986-87.

3. The deficit on the budget in Malaysia, therefore, has always come from development expenditure. This is a good thing so long as the development expenditure is properly planned in order to increase the productive capacity of the economy.

4. It is for this reason that the EPF was set up to fund domestically the economic development of the nation - so that with the increase in productive capacity, tax revenue will rise and sufficient to give a good return to EPF. It is correct that the future income stream of long-term savers should be tied to the long-term prospects of the national economy.

5. The problem of the economy started when the government focused more on job creation rather than increasing productivity - by giving excessive concessions to transnationals whose profits are not translated into the national revenue. The opening up of the stock market to entice stockbroking activities to fund investments provided another leakage to the national revenue. In the end, this arrangement fell flat in its face in 1997.

6. With the holes created in the direct taxation system and the loss of economic direction, the government stifled its own capacity building without properly rejuvenation of the civil service and raised development expenditure to resuscitate a dying economy. As the economy falters, the cost of keeping it alive becomes higher and higher.

7. The economy fails to recover even with constant fiscal stimulation because there is massive structural breakage in the economy. The manufacturing sector that was to be did not materialise.>The privatised monopolies became GLCs whose KPI to turn a profit without appreciable improvement in their operating systems or future development plans means an economy burdened by higher costs.>The FDIs all disappeared to China, together with the SMEs which had cashed out through the second board.>What we have left is a plantation economy that is reliant on a low-currency policy and low wages (through imported labour) to survive in the increasingly competitive global economy.>The only activity worth pursuing is speculation as a result of an easy money which stimulates the real estate sector - which is probably the only game in town.>The investments in manufacturing that was to come from Khazanah did not materialise in this country - Khazanah is making splendid investments abroad developing foreign economies in search of paper profits.

8. In other words, the Malaysian economy has come round one big circle to become yet another commodity exporter, now with more housing estates and shopping malls and more roads for more cars to drive around - financed by oil money and an incapacitated banking system.

9. With the economy in the doldrums, it is perverse that experts are calling for the imposition of the consumption tax to burden the people by raising their purchasing price and reducing the volume they consume - in order to close the gap in the budget. If that is the objective, it is far better to reduce the development expenditure called stimulus packages and keep the consumption tax at bay, at least, for the time being.

10. To rebuild the economy, we have to rebuild our industrial base. We have to retrain our entrepreneurs and SMEs not to speculate in the stock market and the real estate and to devote their talents to creating goods for which there is a need for, to create a new world. The services sector should grow but not on its own; it should be in conjunction of the needs of the agriculture and industrial sectors. The central policy should mature from an agarian concern to one of the needs of modern industries where the challenge is to set the environment for the rewarding of the persistent efforts at increasing productivity gains and hence the payment of higher income per head when benchmarked internationally.

4 comments:

vinnan
said...

'To rebuild the economy, we have to rebuild our industrial base.'

Malaysia never had an industrial sector. All Malaysia ever had were factories churning out products using imported machinery and labour for a foreign market. The ICA made damn sure no local company would want to stay in Malaysia over the long term while foreigners are just fair-weathered friends. It was a good thing that Mahathir was not able to screw around with the plantation sector or we will have nothing at the moment.

A plantation economy can act as a base in the renewable fuel industry and I am not just referring to biodiesel. Look at how the US is leveraging on their natural advantages in the argriculture sector to go from corn-based ethanol to cellulosic ethanol. The biotechnology that goes into this area is expanding exponentially. Bush ethanol initiative was put into law via the Energy Policy Act of 2005. The US will see its first commercial-sized cellulosic ethanol plant in 2011. The Canadians with their agriculture economy are also making great strides in this area. However, with the ICA and a PM who is more interested in engineering power grabs and collecting frogs, we do not have a hope in hell here.

I'm actually more concerned with the welfare impact of a GST - it's a regressive tax.

Since the lower income earners have a higher propensity to consume, a consumption tax will fall disproportionately on those least able to afford it.

If on the other hand we assume that basic necessities will not be covered under a GST, then the tax will generally fall on those paying income tax anyway - which means that greater tax collection might not materialise anyway.

hi,i'm looking forward for more of your entries,but it seems to be you were inactive for a very long time,please i am one of those silent readers out there who really values your writings,so please continue on your good writing again.